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Would Sanusi’s funding schemes unlock credit to the real sector?

By Babajide Komolafe
The first year of Sanusi as CBN Governor has witnessed a renewed attempt to stimulate real sector financing by banks. Past attempts in this regard by previous CBN Governor produced little or no result hence lending to the real sector remains below 30 per cent of total lending to the economy.

Sanusi

Banks, due to their desire for quick profits, has shown strong preference for commercial activities and services in their lending activities. However, given the criticality of the real sector to the growth of the economy and employment generation, the government through the apex bank had in the past have to use policy measures to compel them to devote significant attention to the real sector especially SMEs which are regarded as engine of growth.

These include the sectoral credit allocation and interest rate cap of the 70s and early 80s. Then came the era of deregulation where the apex bank resorted to moral suasion. Since 1986, the most notable attempt in this regard was SMIEES and the Rediscounting and Refinance Facility initiated by the former CBN Governor, Chief Joseph Sanusi.

While SMIEIS recorded some success with banks investing N28.2 billion in 333 Small and Medium Enterprises projects across the country before it was systematically killed by the Professor Soludo led CBN due to pressure from the banks, the RRF moribund as it never really took off. So, banks apathy to real sector financing especially SMEs persist  the  growth  and  jumbo profits enjoyed by banks in recent times  did not reflect in the   real sector, where capacity utilisation had been declining.

The situation has been aggravated by the credit freeze occasioned by of the global financial crisis and the CBN intervention in banks.
Perhaps in sympathy to the plight of the real sector or in reaction to the public outcry and criticism of the severe impact of the intervention in banks on the economy especially the mass sacking of about 20,000 workers in the finance sector, the CBN Governor, Mallam Lamido Sanusi, after his Rambo style sacking of eight banks CEOs has been initiating some measures to compel bank. As a prelude to this the Bankers Committee held a National Retreat on The Role of the Financial Sector in Economic Development. In a way reminiscent of the announcement of SMIEIS in 2001, the Bankers Committee,

under the influence of Sanusi, announced commitment to funding of critical sectors of the economy.  Sanusi himself announced this decision saying,  “ The Bankers Committee has adopted a philosophy of greater sensitivity to socio-economic imbalances and a goal to expand the scope of economic activities and segments of society that have access to financial services “We have embarked on a regulator led collaborative process to enable operators within the financial system partner with government at the federal and state levels to transform national economic development.” We have identified three key sectors of the real economy-Power, Transportation and Agriculture where the need is most urgent, and there is potential for change that will drive other sectors and contribute in a tangible manner to economic development of the nation.”

But as the effect of the banking intervention bite harder and businesses complained about the crushing effect of the credit squeeze, it became obvious to the CBN that what was needed is more than commitment but action and urgent measures to save the real sector.

Consequently, the CBN at the end of its 68th Monetary Policy Committee (MPC) meeting announced the establishment of a N500 billion facility for investment power projects, and restructuring and refinancing existing portfolios to manufacturers. For this purpose the CBN is to issue investment of the sum of N500 billion Debenture Stock to be issued by the Bank of Industry (BOI). In the first instance, the sum of N300 billion will be applied to power projects and N200 billion to the refinancing/restructuring of banks’ existing loan portfolios to Nigerian SME/Manufacturing Sector. These Guidelines relate to the N200 re-financing and restructuring of banks’ loans to the manufacturing sector and those for the power sector will be issued at a later date.

The objectives of the fund according to the implementation guidelines are to Fast-track the development of the manufacturing sector of the Nigerian economy by improving access to credit to manufacturers; Improve the financial position of the Deposit Money Banks; Increase output, generate employment, diversify the revenue base, increase foreign exchange earnings and provide inputs for the industrial sector on a sustainable basis.

The Fund is to used for:  Long term loan for acquisition of plant and machinery; Refinancing of existing loans; Resuscitation of ailing industries; Refinancing of existing lease; and Working capital. Two outstanding features of the facility are that it is long term loans of between 10 to 15 years, and at concessionary interest rate of 7.0 per cent. Also banks can lend as much a N1 billion.

However the facility is open to; any entity falling within the definition of an SME and/or manufacturer; an entity wholly-owned and managed Nigerian private
limited company registered under the Companies and Allied Matters Act of 1990.  A legal business operated as a sole proprietorship; Be a member of the relevant Organized private sector associations such as MAN, NASME, NACCIMA, NASSI.

To compliment this and encourage banks to lend to SMEs, which usually considered high risk by banks, the apex bank designed and introduced a credit guarantee scheme specifically for promoting access to credit by SMEs in Nigeria.

The Scheme  has a  fund of N200 billion wholly financed by the CBN and its objectives are The objectives of the scheme are to: Fast-track the development of the manufacturing SME sector of the Nigerian economy by providing guarantee for credit from banks to SMEs and manufacturers;  Set the pace for industrialization of the Nigerian economy; Increase the access to credit by promoters of SMEs and manufacturers; Increase output, generate employment, diversify the revenue base, increase foreign exchange earnings and provide inputs for the industrial sector on a sustainable basis. Activities to be covered Under the Scheme are:  Manufacturing, Agricultural Value Chain, Educational Institutions, Any other activity as may be specified by the Managing Agent from time to time. According to the guidelines a SME can borrow up to N100 million which can be in the form of Working Capital, Term Loans for refurbishment/equipment, upgrade/expansion, overdrafts, etc

The guarantee cover provided for banks loan to SME under the scheme is 80% of principal and interest and is to be valid up to the maturity date of the loan with a maximum tenure of 7 years
inclusive of a 2-year moratorium.

The Guarantee is executed at the point of the loan disbursement by the Bank to the customer and shall be redeemed when the facility becomes non-performing and classified under the loss category of the Prudential Guidelines.
While these initiatives have been commended, their effectiveness and success in unlocking credit to the real sector would form part of the criteria for assessing the Sanusi’s tenure as CBN governor.

In fact the role of banks in the implementation of the initiatives as spelt out the guidelines indicate that much of their  success depends on banks willingness to lend, promptly process the application for loans. There is no aspect of the guidelines that makes it mandatory for banks to lend.

The only mandatory aspect is the deadline for processing of loan application, 60 days for SME credit guarantee scheme and about one month for the N500 billion sector funds.

For example the guidelines for the N500 billion Real sector fund stated that banks are to, “Approve requests under the Fund based on normal business consideration and exercising appropriate due diligence”. This gives room for banks to refuse to lend and frustrate the initiative if they choose to.

And that is why there is concern that except the CBN put pressure on the banks; the initiatives might not result into increased significant lending to the real sector, and hence go the way of past initiatives like SMEIES.

However, of the two initiatives, the N500 billion real sector funds have a better prospect to succeed given that the money to be lent belongs to the apex bank and not the banks, and there is an interest margin of about five per cent for the banks.

But, going by the performance of the Agricultural Credit Guarantee Scheme (ACGS), the SME Credit Guarantee might not achieve significant impact except the CBN can enhance it with attractive incentives or review the guidelines to include provisions that make lending under the scheme mandatory.

For example, given perchance of Nigerian banks for awards, the apex bank can introduce an award to recognize and celebrate banks that lend to SME under the scheme. Whichever way, Sanusi, like his predecessors, would soon discover that introducing these initiatives is the easiest part of the job and the implementation to make credit flow to the real sector is like making a camel pass through the eye of a needle.


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